Most people think that debt is necessary, but you can live without using debt or having to worry about your credit score. The benefits of living without credit cards and debt are easy to understand, but it’s also important to know the challenges that you’ll face and what you can do to overcome them if you decide to stop playing the credit and debt game.
One of the main challenges to living without credit cards and debt is having to pay for everything using cash. But it doesn’t have to be paper money; you can use a debit card. If you aren’t going to borrow money, it can take more savings, more time – or both – before you can afford major purchases.
So, keep this in mind when you decide to start living without credit cards and debt. You’ll have to save up a lot of money before you can purchase a new car without having to finance it, and it’s going to be even more challenging to purchase a home. Those who rent might be forced to pay more money up front to show that they’re a safe choice.
Living Without Credit Cards
Here are some ways that you can start living without credit cards in our cashless society:
Use a debit card or cash to pay for everyday expenses; this includes meals, entertainment, groceries, etc. Using cash is an easy way to budget your money, especially if you use the envelope method to allocate your money by purpose. But you also need to realize that keeping cash around can be dangerous.
Having a debit card linked to your personal checking account provides you with the convenience of what looks like a credit card, but only allows you to spend the money you have in your bank account.
If you’ve gotten used to paying your monthly expenses (i.e., gym memberships, utilities, or cell phone bills) using a credit card, it’s an easy habit to break. Simply switch your monthly payments to online bill payments. This way, your bank will send the funds to your biller by electronic transfer or check.
Just like with a credit card, you’re able to set up your monthly payments to happen automatically. Alternatively, you can always pay your monthly expenses with your debit card, which means that you will input your card number to pay your bills.
What if you haven’t opened a checking account? That’s okay! You can choose to use a prepaid debit card in place of a debit card. Prepaid cards can be “loaded” with money before using them, then you swipe the card or make your online payments with the loaded balance. The card will stop working after you’ve used up all the money.
Credit Cards vs Debit Cards
Prepaid cards and debit cards are riskier to use for everyday expenses than credit is. If someone gets ahold of your debit card number and builds up expensive charges, all of those expenses will come directly out of your bank account. While you’re typically protected from errors and fraud, you’ll have to act quickly to let your bank know about the fraud to get the best protection.
The main issue here is that your bank account might get emptied temporarily, which can cause bounced payments. This can lead to a domino effect of things that you’ll have to clean up. However, when a credit card number is stolen, the thief spends the card lenders money, which provides you with more time to clean it all up without getting your bank account involved.
There can be an issue if your debit card is swiped before the final balance is fully known. This generally occurs when you open a tab at a bar or rent a hotel room.
The merchant sets up a pre-authorization on your card, which will temporarily freeze the money in your checking account for that pre-authorized amount. These charges will typically go away after a couple of days, but several charges on an account without much money can be an issue.
You might have enough money in your account, but if you aren’t allowed to use it because of a hold, your checks could bounce, and your debit card could be declined. So, it’s important that you keep some extra money in your account to avoid any problems and regularly check your available balance.
Purchasing a Home
Some people feel that the thought of living without credit cards ends when they decide to purchase a house. You can choose to save money to get a house and pay cash for just about everything, but homes can cost you hundreds of thousands of dollars. This can take a long time to save up for most people.
If you opt to try for a mortgage while living without credit cards and debt, you’ll have to work much harder than other borrowers to show that you’re creditworthy because you don’t have the same credit history other borrowers have.
You’re going to have to be approved based on “alternative” factors, especially if you don’t have a FICO score, to be approved for any home mortgage loan. This will limit the number of lenders willing to work with you and what loans are available. It can also lead to higher interest rates.
The United States government typically guarantees the loans you’re going to find, such as an FHA loan. To figure out your creditworthiness, the loan lenders will search for information regarding regular on-time payments, such as insurance premiums, utilities, and rent. Make sure that you’re making on-time payments for 12 months or more before applying for a mortgage loan.
Another important factor to understand is the amount of income that you have leftover to help you repay that loan. When lenders do manual underwriting –you’re going to need this if you don’t have a traditional credit history – they will need to look at your debt-to-income ratio to if it’s lower than 43 percent.
When someone is living without credit card debt and other debt, it means spending less than 43 percent of income on expenses; this includes the mortgage payment too.
It’s helpful to make sure that you have enough money in your bank account. If you’re living without credit cards and debt, then you’re probably already here. The more financially secure you can be, the higher you’re chances of being approved – even if you don’t have a credit history like other borrowers.
Credit lenders are searching for one thing, or something like it: stability. Having a long employment history is extremely helpful because this suggests that you’ll continue working for a consistent income.
What industry you’re working in can also play a key role when lenders decide to give you credit. For example, seasonal employment can be seen as much less dependable than, say, a job in the government.
Time for Closing
Without a traditional credit score, it will take a longer time to obtain the loan. This is because manual underwriting can be very labor-intensive. After all, someone must evaluate and review all the details.
Because of this, it can be a big disadvantage if you’re trying to buy a home in a fast-moving market with high demand. Get started on the mortgage borrowing process ASAP if you’re living in an area with a fast-moving market way before you go to put in an offer.
Should You Be Living Without Credit Cards and Debt Completely?
Before you start living without credit cards and debt completely, you must understand why having good credit is a great idea before you decide to go without to make the best decisions:
- It doesn’t cost anything to build good credit and keep good credit scores. You’re only going to be paying off interest when you start borrowing money. If you don’t have to borrow, then using one credit card and paying off the balance in full each month is a good idea. You will have a grace period of 30 days before interest starts being charged, so by doing this, you’ll never pay interest, and you’ll keep up your good credit
- If you need money, it’s always a great idea to have a good credit history. Also, opting to keep a card open only for emergencies can be a great idea but avoid using it for something that’s above your ability to pay off.
- Erasing the past won’t happen. Even when you decide to start living without credit cards, your credit usage history will remain and cause problems if it’s left in bad shape. Debts will eventually fall off your credit report, but this takes many years.